Legality of hiving off assessment-related work

T. N. Pandey

By outsourcing data entry and TDS work, the I-T Department is committing a breach of trust with regard to information furnished to it in a fiduciary capacity

Report No. 10 of the Comptroller and Auditor General of India (CAG), placed in both the Houses of Parliament on May 19, 2006, raises important issues concerning outsourcing of assessment-related work by the Income-Tax Department.

Since 2003, on the recommendations of the Kelkar Task Force, the Department has been using the services of third parties for data entry of returns. Similarly, work relating to PAN and TDS has also been outsourced on a big scale. Is such outsourcing by the Department legal?

Legality of outsourcing

The income-tax return of an assessee is a sensitive and confidential document, whose disclosure to third parties is not permissible.

Section 54 of the I-T Act of 1922, and, after its repeal, Section 137 had placed fetters on the exercise of powers by the courts, and so on, in respect of specified documents, notwithstanding anything contained in any other law.

With the repeal of the 1922 Act and omission of Section 137 from the I-T Act, 1961, such fetters were removed. But the changes in law did not mean that any one was free to see the income-tax records of assessees.

After the repeal of 1922 Act and omission of Section 137, Section 138 was enacted concerning the disclosure of information with respect to assessees. The section, in its present form, permits disclosure of information concerning taxpayers by the Department only to:

Any officer

, authority or body performing any functions under any law relating to the imposition of any tax, duty or cess or dealing in foreign exchange; or

Any officer

, authority or body, functioning under any other law as may be specified by the Central Government in public interest in an appropriate notification.

Thus, disclosure of information received or obtained by any income-tax authority in the performance of his functions under the I-T Act generally is not permissible.

Section 59B of the 1922 Act has, with some changes, been brought back in the form of Section 138(1)(b), permitting the Chief Commissioners of Income-Tax (CCITs) to give information on any assessee in respect of any assessment under the I-T Act provided:

An application

is made in the prescribed form; and


is satisfied that it is in public interest so to do.

Section 138, thus, does not authorise the I-T Department to

suo motu

disclose information furnished by an assessee to any one, except in the circumstances specified in the section.

Viewed from this angle, the outsourcing of returns by the Department to private agency/agencies for data entry purposes is illegal, being in violation of the Section 138 of the I-T Act, 1961.

What has been said with regard to data entry concerning returns equally applies to information concerning TDS forms and returns. These documents contain information which show the future prospects in regard to incomes or losses concerning the different assessees.

And if seen by outside sources, these can cause considerable damage to the business and reputation/goodwill of the taxpayers.

Hence, outsourcing of such work would also go against the provisions of Section 138.

Apart from the legal objections, there are a number of procedural and other deficiencies in outsourcing the work relating to data entry. According to the CAG:

There is

no coherent policy regarding identification of the areas where third party service-providers should interface with the I-T Department.

The instructions

issued to CCITs for outsourcing of data entry were inadequate and did not lay down guidelines for critical issues of confidentiality, non-disclosure, accountability, etc.

Funds are

placed at the disposal of the CCITs without detailed and specific guidelines as to their use.

The Department's

work is highly sensitive in nature and outsourcing of core departmental functions is a risk, and this needs to be recognised and controlled.

Also, according to the CAG, there is no specific policy regarding contract with third party service-providers. General conditions of contracts were not specified in requisite detail. No model contract was sent as a guidance while entering into actual contracts.

Sensitive issues of security, accountability as well as ensuring correctness of data entry were not appropriately addressed.

CAG recommendations

Hence, the CAG has recommended that the Department:

Prepare a

policy document on the nature and kind of services that can be outsourced to third parties;

Lay down

detailed guidelines regarding hiring of third party services; and

Have a

well-defined responsibility and accountability statement for any major outsourcing as significant as data entry of returns.

The CAG has observed that the I-T return of an entity is confidential information in the hands of the Department.

However, the Department has not ensured that the relationship with the third party service-provider was adequately safeguarded by appropriate provisions in the contract and supporting processes in a standardised manner. The guidelines provided are sketchy and inadequate.

The procedural and the fundamental issues have been covered by the CAG in Report No. 10. However, the basic issue, namely, whether the Department is contravening the provisions of Section 138 and confidential aspects relating to information furnished by the assesses, has not been dealt with.

It is apparent that in outsourcing data entry and TDS work, the Department is committing a breach of trust in regard to information furnished to it in a fiduciary capacity, in violation of Section 138 of the I-T Act, 1961. Hence, this aspect needs to be examined.

(The author is a former Chairman of CBDT.)

(This article was published in the Business Line print edition dated June 17, 2006)
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